The concept of working off the books means that a person is being compensated in cash for services performed, but the payments are not recorded on the books of the employing business. The business offers this sort of arrangement in order to avoid paying any payroll taxes, as well as to avoid paying for workers' compensation insurance and any of the benefits normally offered to its employees, including medical insurance and vacation pay.
The person accepting a "working off the books" arrangement may do so out of desperation, since there is no other work available. Alternatively, the individual may not have a work permit, or may be trying to avoid any record of earnings in order to avoid child support obligations.
There are a number of issues with working off the books that both the employing business and the person being paid should be aware of. Consider the following:
- Payroll tax liability. The employer now has a liability for the payroll taxes that it did not withhold and remit to the government. Also, the person being paid still has an obligation to report the earnings and pay income tax on the earnings; if not reported, the person is liable for both the related income tax and penalties.
- Social security credit. Since no payroll taxes were remitted to the government, the person being paid does not receive Social Security credit for the payments, which translates into reduced Social Security payments (if any) upon retirement.
- Injury compensation. The person being paid is not covered by workers' compensation insurance, and so must personally pay for any medical care received if there is an injury resulting from work for the employing business.
- Unemployment income. If a person receiving cash from an off the books situation is also receiving unemployment payments, it is possible that the unemployment payments must be paid back, with interest.
The issues noted here do not mean that working off the books is illegal in all cases. There are a variety of situations, typically involving very small payments, where the concept is legal. However, any substantial payment from the employing business to an individual that is working off the books is probably illegal until proven otherwise.
A working off the books arrangement is not the same as treating the recipient of payments as a contractor. Under a contractor arrangement, the employing business is formally recording the payments made, and reports this information to the government following the end of each calendar year on a Form 1099.
Working off the books is also known as working under the table.